Canadian Mortgage Market ‘Buoyant’ As Economy Slows

On whole, Canada’s markets for mortgages and real estate keep buoyant, despite (and in confront of) extensive retrenching in housing markets across most of the United States – Canada’s largest trading partner and the world’s largest economy. While some financial soothsayers and the media may point with alarm to the recently released numbers for Canada’s overall economic performance in the first quarter of this year – reports released at the end of March show that the Canadian economy experienced its first decline in annualized growth in five numbers during the first quarter of 2008 – closer examination show that the economic activity inner the economy, and hence Canada’s mortgages and real estate markets, keep strong.

One of the strongest assurances for Canadians is the continuing strength of the Canadian loonie versus the U.S. dollar. Douglas Porter, deputy chief economist at BMO Capital Markets, notes that the rise of the Canadian dollar against the U.S. greenback (the world’s traditional benchhmark money) has resulted in a 14% increase in the prices we receive for our exports while the price of imported goods has dropped 11%. This differential, according to Mr. Porter as reported in the Financial Post, “has helped raise Canadian real income, which is now rising at a 3.7% year-over-year speed compared with 1.5% for the United States.”

“The Canadian economy has lost important momentum in recent months,” reports Aron Gampel, an economist with Scotiabank’s Global Market Research Group, “but nevertheless appears to be clearing a large number of hurdles in its way.” These hurdles, according to Mr. Gampel, “include the U.S. downturn, the spillover from the (recent) credit crunch, current global competitive pressures, and a strong loonie, alongside the current rise in food and energy costs.”

Indeed, it appears that many of the economic pressures that are reflected in the recently-released numbers that show Canada’s economy stalled slightly in recent months are a consequence of an economy that is, in many ways, retooling to participate more efficiently and competitively in world markets. “The big drag on the economy in the first quarter,” according to the Financial Posts‘s Jacqueline Thorpe, “was continued turmoil in the auto sector which was sideswiped by the retooling of form lines and a strike at a major U.S. parts supplier, in addition to an current restructuring.” “Manufacturing overall, ” Ms. Thorpe notes, “declined at twice the speed of last year while inventory accumulation plummeted.”

So what does all this average for Canadians and the Canadian mortgages and real estate markets? Well, first off, it appears that Canadian mortgages and real estate markets continue to be buoyant as the formerly white-hot housing market slows to sustainable levels versus Canada’s continuing low level of inflation. Inflation is always an economist’s bugaboo and the principal facet of an economy that central bankers keep a cautious eye on. On this front, Canadians look good.

“despite the sticker shock facing drivers as they fill up at the pumps, Canadians are enjoying enviable inflation relative to most other nations,” according to Scotiabank economist, Adrienne Warren. While the economy’s growth stalled in the first quarter of ’08, real income has continued to grow (and at a rate far outstripping our southern friends) but without meaningful overall price inflation. Unlike the United States’ overly speculative housing bubble that burst quite spectacularly, it appears that Canada’s overall real estate market has settled into a soft landing. The cooling without crashing of Canadian home prices, according to Ms. Warren “is beginning to alleviate one of the more meaningful supplies of upward pressure on inner inflation in recent years.”

Given all this, despite the numbers that show economic growth was more-or-less stalled in the first quarter of 2008, it seems that in real terms our outlook remains very positive. For Canadian mortgage and housing markets, it seems likely that the current low mortgage rates are likely to keep that way in the near term. Central bankers at the Bank of Canada will be keeping a close eye on the inflation numbers when they meet again in June.

already with the recent pause in economic growth it seems doubtful that there is much room for meaningful cuts to Canada’s main lending rate. Rather, the predictors and tweakers at the Bank of Canada are likely to be looking closely at increases in energy and commodity prices to ensure that inflation won’t pick up as our economy rights itself and reclaims its buoyancy. This is probably the best of news for Canadian homeowners and prospective home buyers, in addition as the Canadian mortgage and real estate markets. It would seem that current low mortgage rates are here to stay in the near term, and any changes – increases or decreases – are only likely to be marginal.

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